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Cronyism in Business, Public Sector and Politics

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  • Zudenkova, Galina

Abstract

This paper contrasts the incentives for cronyism in business, the public sector and politics within an agency problem model with moral hazard. The analysis is focused on the institutional differences between private, public and political organizations. In business, when facing a residual claimant contract, a chief manager ends up with a relatively moderate first-best level of cronyism within a firm. The institutional framework of the public sector does not allow explicit contracting, which leads to a more severe cronyism problem within public organizations. Finally, it is shown that the nature of political appointments (such that the subordinate's reappointment is conditioned on the chief's re-election) together with implicit contracting makes political cronyism the most extreme case.

Suggested Citation

  • Zudenkova, Galina, 2011. "Cronyism in Business, Public Sector and Politics," MPRA Paper 30231, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:30231
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    More about this item

    Keywords

    Cronyism; Meritocracy; Manager; Bureaucrat; Politician.;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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